PART 4: CAPITAL STRUCTURE AND PAYOUT POLICYUnderwriting spreads vary considerably depending on the type of security being issued. Banks charge
higher spreads on equity issues than on debt issues. They also charge higher spreads for unseasoned
equity offerings (that is, IPOs) than they do for seasoned equity offerings. In general, the riskier the security
being offered, the higher the spread charged by the underwriter. Securities that have both debt- and
equity-like features, such as convertible bonds and preferred shares, have spreads that are higher than
those of ordinary debt but lower than those of ordinary shares.
Spreads on non-US IPOs tend to be significantly lower than on US initial offers. In part, this reflects
differences in underwriting practices across countries. To assess demand for a company’s shares and to
set the offer price, US underwriters typically use a process known as book building, in which underwriters
ask prospective investors to indicate their demand for the offering. Through conversations with investors,
the underwriter tries to measure the demand curve for a given issue, and the investment bank sets
the offer price after gathering all the information it can from investors. Book building has become
increasingly common in international markets, but a method called a fixed-price offer also survives. In
fixed-price offers, underwriters set the final offer price for a new issue weeks in advance. This imposes
more risk on the underwriters, for which they must either charge higher spreads or price the shares far
below the expected post-offer price. Thus the observed spreads are actually lower on fixed-price offers
than in book-built offerings.
In Australia, both book building and fixed-price offers are common. Companies usually rely on their
stockbrokers or investment banks to provide advice on the most appropriate method, as well as the most
appropriate offer price, the number of shares to be issued at the IPO, and its structure, size and timing.
Since investment banks compete for business by getting recognition of their deals, publicity is often
an important aspect of many of the deals they complete. Various organisations publish league tables to
show how different marked participants rank against each other. If a financial intermediary has achieved
a high ranking, they may use these league tables as part of their credentials for winning further business.
Table 12.1 provides an example of a league table for the Australian ECM industry. A bookrunner is
another term used for the lead underwriter of a security issue.book building
A process in which
underwriters ask prospective
investors to reveal information
about their demand for the
offering
fixed-price offer
An offer in which the
underwriters set the final offer
price for a new issue weeks
in advance
bookrunner
The lead underwriter in a
security issueTABLE 12.1 AUSTRALIAN ECM BOOKRUNNER LEAGUE TABLE, 8 JANUARY 2015All ECM (IPO, FO, Convert) Bookrunner ranking – Australia
Rank. Bookrunner Deal value ($m) Number of deals Market share (%)
1 Morgan Stanley 282 1 19.3
1 Macquarie Group 282 1 19.3
1 Deutsche Bank 282 1 19.3
4 UBS 277 2 19.0
5 Bank of America Merrill Lynch 169 1 11.6
6 Canaccord Genuity Corp 103 2 7.0
7 Morgans Financial Ltd 12 2 0.8
8 Moelis & Co 11 1 0.7
9 Wentworth Global Securities Pty Ltd 9 1 0.6
10 Foster Stockbroking 8 2 0.6
Subtotal 1,434 11 98.3
Total 1,459 21 100.0
Source: Australian Financial Review. Used with permission.